Investment Performance - targeting 7.0%+ p.a.

May 7, 2017 19:00:31 GMT Greenwood2 said:

Seems to be 6.5 % after fees, but that isn't right either because fees are taxable so the rate before losses is lower depending on your tax rate. 

What you eventually get out of BM depends on who you are and how you use your account ... in addition to how well BM manage the platform of course ...

The most confusing parts of BM to most people are the multiplicity of interest rates, the investment deployment times and the overall deployment level, which can seem to take an eternity to reach 100%. There seems to be very little further clarification on what all these factors really mean to people as individual investors ... in order to achieve their particular financial goal.

Everyone has the same opportunity to use the scheme as they choose, but as I see it, there is only one way to get the very best results here ... and that is to reach a fully invested target amount as quickly as you can and then just leave it for as long as you can, with no further deposits or withdrawals ... (except perhaps very small amounts may be possible without jeopardising the potential long term returns too much ).

When the scheme is working as it is designed and there is never any shortage of new funds to replace those maturing within your account, then you will always be very close to full allocation and your daily rate of return will always be very close to the headline rate at the top of the summary page, before any associated fees or personal tax issues.

This rate has very little to do with detailed XIRR calculations, ramp up times and all the other variables that always confuse people, when they are trying to understand how well their account is performing. Once you remain fully invested, it is really the only future return figure that matters. Providing all the BM investment algorithms are set and operating correctly, this figure can prove to be very stable over time and thereby give a very predictable return.

To my mind it is the most important rate of all and is simply the annualised daily  growth rate that I am enjoying, so every day my balance is increasing at a relatively predictable rate.

Unfortunately you need to compute this from the daily changes in your balance, which tend to go up and down like a yoyo because of the continual conversion of accrued to paid interest.

But you can average this out with double smoothing algorithms (readily available on most spread sheet programs) and then it becomes evident within a matter of weeks. It then changes very little at all over the following weeks and months as the BM algorithms always constrain it in line with their pre-set target rules.

In this way I find my daily returns are around 7.5% to 7.6% pa, as they have been for the past 2 months now. They are always remarkably close to 1% below the headline rate at the top of my summary page. I conclude from this that the BM fee is the most dominant part of my total fee.

This  makes nonsense of a (presumed XIRR) target rate of 7% of course, as it exceeds it. Even with the revised charges of 1.5%, it will still be very close to 7% for me. If my loan selection was blended in the same way as the platform rate, currently at 8.8%, then I would be enjoying a rate of 7.3% after fees of 1.5%. You will find it very difficult to beat this rate elsewhere for a fully managed hands off account.

So the other side of the coin is potential defaults and these can only be controlled through careful selection by the platform operator and then optimising the diversification as much as possible. As I understand it, these measures are currently the main focus of attention at BM.

I don't have any defaults yet and my current watchlist threat is slowly evaporating away, due to sporadic capital repayments on an ID loan and on-going refinance on a bridging loan (that really should never have been on the watchlist in the first place).

Once your funds are fully deployed at the end of the ramp up, the risk profile continues to improve with time, so that any future default threat eventually become fully diluted to your lowest concentration setting. Hopefully the platform should allow this to become even lower than 1% in time. It is something all long term investors are seeking of course.

I am not sure that a monthly withdrawal option makes much sense at the moment and certainly BM have rightly put this on the back burner, whilst they concentrate their efforts on minimising potential defaults and looking towards improving the diversification options. I think it might makes sense after you are fully invested for a year or more and your fund growth rate and risk factors have stabilised to allow a fairly predictable and consistent monthly return.

As regards feeding in a regular monthly amount, I think this should only be done if the regular deposit is a very small percentage of your total investment, so that it provides very little threat to your 100% deployment target. Maintaining full deployment and targeting maximum diversification over extended periods of time are the only ways to optimise any long term growth target.

Edit: For those that consider XIRR the only true way to calculate investment returns, my latest calculation gives a result of 6.5% which is still rising. Any losses at the moment are purely speculative but the data available at present indicates a figure of less than 0.67%.